Still struggling with its exposure to Latin America and the ailing telecommunications sector, J.P. Morgan Chase & Co. delivered a gloomy outlook Tuesday for credit quality and revenue growth.
In a Securities and Exchange Commission filing, Morgan Chase said that telecommunications and cable loans categorized as "criticized" rose 82% from Dec. 31, to $2 billion on June 30.
"Since the end of the second quarter, there has been a further deterioration in the credits that are criticized and, as a result, it is likely there will be an increase in nonperforming loans in these sectors over the balance of the year," according to Morgan Chase's 10-Q filing of second-quarter results.
Federal bank regulators use the term "criticized" to cover loans that are delinquent, as well as those in danger of becoming nonperformers. Criticized loans get one of three labels: doubtful, substandard, or special mention. Federal examiners take a particular look at large commercial loans once a year, and this month they told bankers which loans should be downgraded. This Shared National Credit exam is one of the things that spur banking companies such as Morgan Chase to revise their credit outlook. The company also scaled back its revenue projections for the second half.
"Difficult market conditions in both fixed income and equities have continued into the early part of the third quarter, resulting in an overall lower trading revenue environment compared with the second quarter," the filing said.
"A lot of it wasn't necessarily new, but the wording was a lot worse than anticipated," said Andrew B. Collins, an analyst with U.S. Bancorp Piper Jaffray. "Trading in particular was a little bit of a negative surprise."
In the filing, Morgan Chase said it increased its loan-loss provision by $482 million in the first half, to $5 billion, or 2.36% of loans, up from 2.08% at yearend. Of that total, reserves to cover potential losses on commercial credits were $1.2 billion on June 30, up 15% from six months earlier.
The company also disclosed that 34% of all commercial chargeoffs in the first half were for telecommunication loans. The European cable industry is suffering "severe liquidity constraints" and "insufficient resources to fund capital expenditures," according to the filing.
Many of Morgan Chase's corporate customers also do business with Citigroup Inc., so it is no surprise that the nation's largest banking company reported similar problems in its Aug. 7 filing.
Citigroup said that corporate credit losses may increase in the second half. It cited weak global economic conditions, stress in the telecommunications industry, market turmoil in Brazil, sovereign or regulatory actions, and the continued economic crisis in Argentina, among other factors.
The company did not reveal the amount of its criticized credits. However, it did say its allowance for credit losses rose by nearly half in the first half, to $1.1 billion, "primarily due to exposures in the telecommunications industry and provisions for Argentina in the first quarter of 2002."
Bank of America Corp. and FleetBoston Financial Corp. have not filed their 10-Qs yet, but Stephen Biggar, an equity analyst with Standard & Poor's, said that he expects those problems to be echoed in their filings.
On Tuesday the Federal Open Market Committee decided to leave the federal funds rate at 1.75%, but it changed its bias for future moves toward a rate cut. The committee said that current monetary policy should "foster an improving business climate over time" but added that "the risks are weighted mainly toward conditions that may generate economic weakness."
Investors reacted negatively to the committee's decision. Morgan Chase's stock rose in early trading but fell in the afternoon, to end the day down 4.16%. Shares of Citi fell 2.88%.
